Wednesday 23rd of July 2008

Hanover Finance's partial demise has forced me to answer a question I have tried to answer before. The question is simple: Is Hanover's default on interest payments a surprise? While it's a simple question it's actually hard to answer. Some say it was inevitable. I've always hoped that Hanover, as one of the bigger finance companies, and one of the better run ones, could outlast the finance company meltdown. In some ways I now think that its "situation" (and I deliberately use that word) was nearly inevitable. As Hanover part-owner Mark Hotchin said to me; you can fight the market, but when it goes like this it's pretty hard, if not impossible to beat. Think about it: a total lack of investor confidence plus no alternative funding lines plus a stuffed property market all equal a formidable opposition. The issue for investors is that the company isn't accepting new deposits (that's easy to handle), but more importantly that interest payments have been suspended. The next interest payment isn't due until September 30, and the company has money in the bank. That money, plus anything it can get back from lenders, may actually give it sufficient for a payment at the end of this quarter. What is worth noting, and something that others will miss, is that suspending interesting payments, and rolling them up into later payments, matches what is happening with lenders. The issue there is that they can't on-sell their properties and repay their loans, consequently the interest payments are capitalised. When they are repaid there is then a reasonable probability that there will be sufficient for debenture holders. I take a different view to some of the uninformed populist stuff seen on TV and the likes about the state of Hanover. Hanover is nothing like Capital + Merchant, Bridgecorp and some of the other finance companies which were poorly run with awful assets. Hanover has good management and, from insiders I know, had a good quality loan book. The other point I want to pick up on is that some of this comment has referred to the shareholders, Hotchin and Eric Watson, taking a fat dividend cheque last year. From what I know these guys have the most to lose in this situation and they want to preserve as much of Hanover's equity as they can. The move today is as much about them protecting themselves as dealing with investors' interests. What Hanover has done is probably the right thing and arguably could have been done earlier. Getting the company to manage its way out of this situation is probably better than handing it over to a receiver who, in all likelihood, would sell the assets at fire sale prices leaving investors with a poor outcome. My guess is that Hanover will live to fight another day.